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23 Mar 2016
New York, March 23, 2016 -- Issue: Systemwide Revenue Bonds, Series 2016A; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $1,100,000,000; Expected Sale Date: 03/30/2016; Rating Description: Revenue: Public University Broad Pledge
Issue: Systemwide Revenue Bonds, Series 2016B-1; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $100,000,000; Expected Sale Date: 03/30/2016; Rating Description: Revenue: Public University Broad Pledge
Issue: Systemwide Revenue Bonds, Series 2016B-2; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $100,000,000; Expected Sale Date: 03/30/2016; Rating Description: Revenue: Public University Broad Pledge
Issue: Systemwide Revenue Bonds, Series 2016B-3; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $100,000,000; Expected Sale Date: 03/30/2016; Rating Description: Revenue: Public University Broad Pledge
Summary Rating Rationale
Moody's Investors Service has assigned a Aa2 to California State University's (The CSU or system) planned $1.1 billion Systemwide Revenue Bonds, Series 2016A and $300 million Series 2016B to be issued by the Trustees of the California State University. The sale amount of the bonds could be changed subject to market conditions. We have also affirmed the Aa2 on outstanding Systemwide Revenue Bonds and Aa3 on outstanding Lease Revenue Bonds. The outlook is stable.
The Aa2 rating for The CSU's Systemwide Revenue Bonds (SRBs) reflects the system's scale as the nation's single largest four-year higher education system, exceptionally strong student demand, solid unrestricted liquidity, and improved state funding reflecting strengthening of California's economy. The rating also favorably incorporates management's demonstrated ability to manage operations through periods of revenue constraint. Offsetting challenges are continued material reliance on appropriations from the State of California (Aa3 stable) and moderately high balance sheet leverage relative to comparably rated large systems or universities, as well as significant retirement liabilities. The Aa3 rating for the Lease Revenue Bonds issued by the State Public Works Board for the benefit of The CSU reflects the bonds' lease structure and abatement risk.
The stable outlook reflects expectations of continued exceptional student demand, well-managed operations producing favorable cash flow and adequate debt service coverage, and maintenance of ample unrestricted liquidity.
Factors that Could Lead to an Upgrade
Substantial growth of balance sheet reserves and unrestricted liquidity resulting in a greater cushion supporting debt
Consistently stronger operations with greater revenue diversification producing more robust cash flow
Factors that Could Lead to a Downgrade
Significant increase in financial leverage
Sustained liquidity decline
Consistently weaker cash flow
The SRBs (Aa2) are issued under a system-wide debt financing program with pledged revenue including gross revenue from various auxiliary and mandatory student fees. Total pledged revenue was $1.7 billion for FY 2015, covering SRB debt service over 6 times. Upon closing of the Series 2016A and 2016B bonds, the Tuition Fee (the basic enrollment charge paid by all CSU students) of approximately $2.5 billion is added to Gross Revenues pledged to the SRBs. There will be approximately $4.9 billion of Systemwide Revenue Bonds outstanding following the current issuance. The CSU has covenanted to not issue senior lien debt. There is a sum-sufficient rate covenant and no debt service reserve fund.
The Lease Revenue Bonds' Aa3 rating (issued by the State Public Works Board) is based on the strength of The CSU's legal obligation to make rental payments from "first lawfully available funds". This is a departure from the past when the rating also reflected state appropriations earmarked for debt service. Effective FY 2015, the state revised its funding methodology to add $297 million, an amount that includes debt service for the Lease Revenue Bonds, to The CSU's annual base appropriation. The CSU intends to refund the Lease Revenue Bonds as the market permits, including the current bond issues.
Use of Proceeds
Proceeds of the Series 2016 SRBs will refund certain outstanding Lease Revenue Bonds issued by the State Public Works Board and SRBs and pay issuance costs.
The California State University was created in 1960 by the Donahoe Higher Education Act, which reorganized higher education in California. Originally 12 schools, The CSU now has 23 campuses and eight off-campus centers. The campuses are located throughout the state and provide a broad array of undergraduate and an increasing number of graduate programs. With nearly 475,000 headcount enrollment, The CSU reports it is the largest single four-year university system in the nation.
The principal methodology used in this rating was Global Higher Education published in November 2015. The additional methodology used in the Lease Revenue bond rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
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Moody's assigns Aa2 to California State University's Series 2016 SRBs; outlook stable
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